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Summary

  • For the quarter, analysts have high expectations for Home Depot, especially on the profitability side of things.
  • In recent years, the company has done well in pleasing its shareholders, but it's uncertain whether management can keep the momentum moving.
  • As the home improvement market reaches maturity, investors might be okay with a stalwart like Home Depot, especially when placed against rival Lowe's.

Heading into earnings on Aug. 19, some investors might be wondering what to make of Home Depot (NYSE:HD). With shares in the world's largest home improvement chain trading less than 1% off their 52-week high, it might be tempting to sell prior to its release and opt for rival Lowe's Companies (NYSE:LOW), but is it possible that the company still has plenty of room to run before peaking?

Mr. Market has relatively high expectations

For the quarter, Home Depot is expected to report revenue of $23.61 billion. If management can match this forecast, it will represent a 5% gain over the $22.52 billion the business reported during its second quarter last year. For a retailer with a $113 billion market cap that has only increased its store count by 0.8% over the past five years, this may seem highly unlikely, but when you consider that its comparable store sales have increased by 19%, in aggregate, over the past four years, this kind of growth may not be out of the question.

Earnings Preview
Last Year'sForecasted
Revenue (billions)$22.52$23.61
Earnings per Share$1.24$1.45

Looking at earnings, Mr. Market has even higher expectations. For the quarter, Home Depot is expected to report earnings per share of $1.45. If this comes to fruition, it will represent a 17% jump in profits compared to the $1.24 reported the same quarter last year. Such an improvement will be due, in part, to higher revenue, but it must also be chalked up to greater margins and/or a decrease in share count. While the former is possible because of the company's decision to focus more on e-commerce (an activity that typically carries higher margins than brick-and-mortar), the fact that its share count has declined by 19% over the past five years suggests that this might be the largest contributor to Home Depot's higher profits.

How does Home Depot fare against Lowe's?

Over the past five years, Home Depot has done pretty well for itself. Between 2009 and 2013, the retailer's revenue shot up 19% from $66.2 billion to $78.8 billion. As mentioned earlier, increased store count had a negligible impact on the company's top line while its aggregate comparable store sales growth was mostly to thank. Lowe's on the other hand, saw its sales grow at a far slower pace, up just 13% from $47.2 billion to $53.4 billion as flat comparable store sales growth was more than offset by a 7% increase in store count.

HD Revenue (Annual) Chart

HD Revenue (Annual) data by YCharts

From a profitability perspective, the divergence between Home Depot and Lowe's has been even greater during this timeframe. Between 2009 and 2013, Home Depot's net income soared 102% from $2.66 billion to $5.39 billion. This was due, in part, to the company's higher revenue but bigger factors at play involved reduced interest expense in relation to sales and a decline in the business's selling, general and administrative expenses from 24% of sales to 21.1% and in its depreciation and amortization from 2.6% of sales to 2.1%.

HD Net Income (Annual) Chart

HD Net Income (Annual) data by YCharts

Over the same five-year period, Lowe's also did well, but not quite as well. Between 2009 and 2013, the company's net income rose 28% from $1.78 billion to $2.29 billion. Just as in the case of Home Depot, Lowe's rising net income can be partially chalked up to its higher revenue, but can also be attributed to a drop in its selling, general and administrative expenses from 24.9% of sales in 2009 to 24.1% in 2013 and a decline in its depreciation and amortization from 3.4% of sales to 2.7%.

Takeaway

As earnings approach, investors are right to question whether it makes sense to hold onto their shares of Home Depot or not. Given its high share price, it wouldn't necessarily be bad to take some chips off the table but, because of the company's long-term growth (especially compared to rival Lowe's), it seems as though the business makes for a strong prospect moving forward.

Source: Earnings Preview: Is Home Depot A Strong Prospect?